Note 8. Property and Equipment

Property and equipment consisted of the following:

	Depreciable	As of
	Life	September 30,			December 31,
	(In Years)	2013			2012
		(In thousands)
Land	—	$	42,849		$	42,312
Buildings and improvements	1-40	375,322			363,338
Furniture, fixtures, equipment and other	1-12	1,146,020			1,064,071
Customer rental equipment	1-5	338,181			251,708
Satellites - owned (1)	10-15	1,949,040			1,762,264
Satellites acquired under capital leases	10-15	935,104			935,104
Construction in progress	—	153,471			455,186
Total property and equipment		4,939,987			4,873,983
Accumulated depreciation (1)		(2,410,412		)	(2,261,699		)
Property and equipment, net		$	2,529,575		$	2,612,284

(1) Balances previously reported as of December 31, 2012 have been reduced to exclude a fully-depreciated satellite that was retired from commercial service prior to December 31, 2012.

“Construction in progress” consisted of the following:

	As of
	September 30,		December 31,
	2013		2012
	(In thousands)
Progress amounts for satellite construction, including certain amounts prepaid under satellite service agreements and launch costs:
EchoStar XIX	$	65,101	$	9,325
TerreStar-2	10,317		—
EchoStar XVI	—		345,090
Other	28,153		25,710
Uplinking equipment	22,366		37,264
Other	27,534		37,797
Construction in progress	$	153,471	$	455,186

Depreciation expense associated with our property and equipment consisted of the following:

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2013		2012		2013		2012
	(In thousands)
Satellites	$	43,722	$	35,443	$	136,795	$	109,561
Furniture, fixtures, equipment and other	31,323		28,638		96,094		90,877
Customer rental equipment	24,611		20,123		71,691		58,414
Buildings and improvements	3,343		3,195		10,024		9,595
Total depreciation expense	$	102,999	$	87,399	$	314,604	$	268,447

Satellites

As of September 30, 2013, we utilized 12 of our owned and leased satellites in geostationary orbit approximately 22,300 miles above the equator. Four of our satellites are accounted for as capital leases and are depreciated on a straight-line basis over the terms of the satellite service agreements. We depreciate our owned satellites on a straight-line basis over the estimated useful life of each satellite.

Recent Developments

EchoStar VI and VIII. DISH Network leases satellite capacity from us on certain of our satellites. The leases for the EchoStar VI and VIII satellites expired in accordance with their terms in the first quarter of 2013. DISH Network no longer leases capacity from us on the EchoStar VI satellite; however, in May 2013 DISH Network began leasing capacity from us on EchoStar VIII as an in-orbit spare. Subject to certain terms and conditions, this lease expires on February 1, 2014. EchoStar VI was fully depreciated in August 2012.

EchoStar XVI. In November 2012, we launched the EchoStar XVI satellite, a direct broadcast satellite (“DBS”). EchoStar XVI is leased to DISH Network for the delivery of direct-to-home (“DTH”) broadcast services to DISH Network customers in the United States. We began to lease capacity on EchoStar XVI to DISH Network in January 2013.

EchoStar XIX. In March 2013, we entered into a contract for the design and construction of the EchoStar XIX satellite, which is expected to be launched in mid-2016. EchoStar XIX is our next-generation, high throughput geostationary satellite that will employ a multi-spot beam, bent pipe Ka-band architecture and will provide additional capacity for our broadband services to the consumer market in North America.

TerreStar-2. In August 2013, we and DISH Network entered into a development agreement (“T2 Development Agreement”) with respect to the TerreStar-2 (“T2”) satellite under which we will reimburse DISH Network for amounts it pays pursuant to an authorization to proceed with Space Systems/Loral, LLC in connection with the construction of the T2 satellite. In exchange, DISH Network granted us a right of first refusal and right of first offer to purchase the T2 satellite during the term of the T2 Development Agreement. In addition, under certain circumstances, we have a right to receive a portion of the sale proceeds in the event T2 is sold to a third party during or following the term of the T2 Development Agreement.

Satellite Anomalies

Certain of our satellites have experienced anomalies, some of which have had a significant adverse impact on their remaining useful lives and/or commercial operations. There can be no assurance that future anomalies will not further impact the remaining useful life and commercial operation of any of the satellites in our fleet. In addition, there can be no assurance that we can recover critical transmission capacity in the event one or more of our in-orbit satellites were to fail. We generally do not carry in-orbit insurance on our satellites; therefore, we generally bear the risk of any uninsured in-orbit failures. Pursuant to the terms of the agreements governing certain portions of our indebtedness, we are required, subject to certain limitations on coverage, to maintain launch and in-orbit insurance for SPACEWAY 3, EchoStar XVI, and EchoStar XVII. The recent satellite anomalies that affected certain of our satellites are discussed below.

Owned Satellites

EchoStar III. EchoStar III was originally designed to operate a maximum of 32 DBS transponders in a mode that provides service to the entire continental United States (“CONUS”). As a result of the failure of traveling wave tube amplifiers (“TWTAs”) in previous years, including the most recent failures in February 2013 and April 2013, only six transponders are currently available for use. It is likely that additional TWTA failures will occur from time to time in the future and such failures could further impact commercial operation of the satellite. EchoStar III was fully depreciated in 2009.

Leased Satellites

Pursuant to our satellite lease agreements, we are entitled to a reduction in our monthly recurring lease payments in the event of a partial loss of satellite capacity, which ordinarily results in a corresponding reduction in the related capital lease obligation and the carrying amount of the respective satellite.

AMC-16. As a result of prior period depreciation and adjustments associated with satellite anomalies, the net carrying amount of AMC-16 was reduced to zero as of December 31, 2010. Therefore, subsequent reductions in our recurring lease payments are recognized as gains in “Other, net” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). In each of February 2012, April 2012, and November 2012, AMC-16 experienced a solar-power anomaly, which caused a partial loss of satellite capacity. Accordingly, we reduced our capital lease obligation for AMC-16 and recognized corresponding gains of $4.7 million in the second quarter of 2012, $7.9 million in the third quarter of 2012, and $6.7 million in the first quarter of 2013. There can be no assurance that the existing anomalies or any future anomalies will not reduce AMC-16’s useful life or further impact its commercial operations.

Satellite Impairments

We evaluate our satellites for impairment and test for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Certain of the anomalies discussed above, and previously disclosed, may be considered to represent a significant adverse change in the physical condition of a particular satellite. However, based on the redundancy designed within each satellite, these anomalies are not necessarily considered to be significant events that would require a test of recoverability.

EchoStar XII. Prior to 2012, EchoStar XII experienced anomalies resulting in the loss of electrical power available from its solar arrays, which reduced the number of transponders that could be operated. In September 2012, November 2012, and January 2013, EchoStar XII experienced additional solar array anomalies, which further reduced electrical power available. Our ongoing engineering analysis, completed in consultation with the satellite manufacturer, has indicated that further loss of available electrical power and resulting capacity loss is likely. The satellite is currently leased to DISH Network pursuant to an agreement that entitles DISH Network to a reduction in its monthly recurring lease payments in the event of a partial loss of satellite capacity or complete failure of the satellite. In the second quarter of 2013, we determined that the undiscounted cash flows from DISH Network were not likely to be sufficient to recover the carrying amount of the satellite. Consequently, in the second quarter of 2013, we recognized a $34.7 million impairment loss within our EchoStar Satellite Services segment to reduce the carrying amount of the satellite to its estimated fair value of $11.3 million as of June 30, 2013. Our fair value estimate was determined using probability weighted discounted cash flow techniques and is categorized within Level 3 of the fair value hierarchy. Our estimate included significant unobservable inputs related to predicted electrical power levels and the number of billable transponders that can be supported by predicted available power. In connection with our impairment analysis, we revised our estimate of the useful life of the satellite. Effective July 2013, the $11.3 million adjusted carrying amount of EchoStar XII is depreciated on a straight-line basis over its then remaining estimated useful life of 18 months.